What Is Underlying Company?

An in-depth explanation of Subsidiary Companies, their characteristics, examples, and their role in the corporate structure.

A subsidiary company is a company that is controlled by another company, which is often referred to as the parent or holding company. In this structure, the parent company holds a majority stake in the subsidiary, typically over 50%, allowing it to exert significant influence or complete control over the subsidiary’s operations, policies, and management.

Definition and Key Characteristics

Subsidiary companies are crucial elements in complex corporate structures, providing various strategic, financial, and operational benefits. The primary characteristics of a subsidiary company include:

Ownership and Control

The parent company holds a controlling interest in the subsidiary, which means it owns over 50% of the subsidiary’s stock or holds significant voting power to influence decisions. This ownership can be established through:

• Direct investment in common equity.
• Voting agreements and contracts.
• Control over the board of directors.

Legal Independence

Despite the control exercised by the parent, a subsidiary remains a separate legal entity. It can enter into contracts, own assets, incur liabilities, and is responsible for its own taxes and regulatory compliance.

Financial Reporting

Subsidiaries must prepare their financial statements, which are later consolidated with the parent’s financial statements for regulatory and reporting purposes. This provides a comprehensive view of the financial health of the entire corporate group.

Types of Subsidiary Companies

Wholly-Owned Subsidiary

A wholly-owned subsidiary is entirely owned by the parent company, meaning the parent company holds 100% of the subsidiary’s shares. This grants the parent complete control over the subsidiary’s operations and decisions.

Majority-Owned Subsidiary

A majority-owned subsidiary is one in which the parent company holds between 51% and 99% of the subsidiary’s shares. While the parent exerts significant influence, the minority shareholders retain some influence and rights.

Examples of Subsidiary Companies

Alphabet and Google

Alphabet Inc. is a well-known parent company with several subsidiaries, the most notable being Google LLC. Google operates semi-independently, focusing on search engines, advertising, and related technological ventures.

Tesla and SolarCity

Tesla, Inc. acquired SolarCity in 2016, making it a majority-owned subsidiary. This strategic acquisition allowed Tesla to expand its footprint in renewable energy solutions.

Special Considerations

Legal Implications

• Liability Protection: The parent company is generally not liable for the debts or legal obligations of its subsidiary, except in cases of fraud or significant mismanagement.
• Regulatory Compliance: Each subsidiary must comply with the regulatory requirements of the jurisdictions in which it operates.

Economic Implications

• Resource Allocation: Synergies in resource allocation and cost efficiencies can be realized within the corporate group.
• Tax Strategies: Corporations may use subsidiaries to optimize their tax positions across different jurisdictions.

Comparison with Related Terms

Affiliates

Affiliate companies are entities where a parent company holds a minority stake, typically less than 50%. This contrasts with subsidiaries where the control is more significant.

Joint Ventures

Joint ventures involve two or more companies coming together to create a new business entity. Unlike a subsidiary, control in a joint venture is shared among the parent companies.

FAQs

What is the difference between a subsidiary and an affiliate?

A subsidiary is controlled by a parent company through majority ownership, while an affiliate has more limited control with less than 50% ownership.

Can a subsidiary have its own subsidiaries?

Yes, a subsidiary can have its own subsidiaries, creating a multi-tiered corporate structure.

How are subsidiaries taxed?

Subsidiaries are taxed independently according to the laws of their respective jurisdictions. However, tax consolidation methods can be applied for financial efficiency.

References

1. Financial Accounting Standards Board (FASB) – Consolidations and Reporting of Subsidiaries
2. International Accounting Standards Board (IASB) – IFRS 10 Consolidated Financial Statements
3. U.S. Securities and Exchange Commission (SEC) – Subsidiary Information Guidelines

Summary

A subsidiary company is a company controlled by another entity, known as the parent company, through significant ownership. They provide strategic, financial, and operational advantages while maintaining legal independence. This corporate structure is widely used in various industries to achieve growth, diversification, and risk management.